As brokers rush to meet the requirements of a regulatory crackdown that will shift most of the $494 trillion market for interest rate swaps onto electronic trading platforms, three big European interdealer brokers – Icap, Tradition and Tullett Prebon – are battling it out to establish a firm base of liquidity. They want to make a mark before the much-delayed rulemakings in the US come into force, expected in February.

In the battle for supremacy, first-mover advantage could prove crucial. The regulation forcing the change in Europe is the markets in financial instruments regulation, or Mifir, which will see over-the-counter derivatives shifted onto multi-dealer “organised trading facilities”, but is unlikely to be implemented before 2015. In the US, the Dodd-Frank Act has similar aims.

Both are designed to fulfil commitments to the G20 to make swaps trading more competitive and transparent. For brokers, who traditionally matched swap buyers and sellers over the phone, both represent a big opportunity.

In Europe, Icap has grabbed a dominant market share in e-trading in euro-denominated interest rate swaps. It launched a platform in September 2010, ahead of rival offerings from Tradition and Tullett Prebon.

For a time, Tradition was outstripping Icap in terms of volumes, becoming the front-runner soon after it launched in May 2011.

But this September, Icap began to pull away, according to people working for both companies. In a record month for both firms, Icap reported 600 trades on iSwap.

In October, that number doubled to 1,200. Icap declined to quantify the notional value of the trades, but on an earnings call last week, Michael Spencer, chief executive of Icap, said it was an eightfold increase over this summer’s low-point, arguing it put the broker “in a good position” in the run-up to 2013.

Tradition’s trades for September came to €80bn. The Swiss broker didn’t give comparable volumes for October, although it is understood they declined slightly month on month according to a person close to the company. Tullett does not release volumes for its platforms.

Over the past few months, each of the three brokers has engaged in talks with major swap-trading banks to try and stimulate electronic activity on their platforms.

On a September earnings call, Icap’s Spencer talked candidly of getting dealers round a table to extract further commitments to direct flows onto iSwap.

Future-proof

The three-way fight will soon be joined by US rivals, which are planning to open euro swaps trading on their platforms. BGC already offers it and rival GFI has plans to build on its hybrid RatesMatch franchise.

Several exchange platforms and start-ups, such as New York’s Javelin Capital Markets, are also planning to register as swap execution facilities, or Sefs, which will likely support euros at some stage.

Dan Marcus, global head of business development at Tradition, forsees a long battle for supremacy: “Europe is still a nascent market for electronic swaps trading. To have a healthy percentage of electronic flow going through our platform in a quiet market, as we wind down towards the end of the year, is encouraging.”

Dealers are reluctant to say which platform they favour, with several declining to comment for this article. But in private, many talk of three similar platforms with little to choose between them.

All three support both hybrid electronic and voice trading, and all three expect to qualify as Sefs under US law, which they must do before banks registered as swap-dealers in the US can trade on them.

One senior swaps banker said: “There is a consensus that the market is over-broked, particularly in light of cuts to fixed-income franchises at the banks.”

Dealers have praised the speed of Tullett’s matching engine, based on technology bought from the London Stock Exchange-owned vendor MillenniumIT. But one also argued speed of execution is not yet a critical advantage in a market like rate swaps.

Some suggest it might take the final implementation of swap-trading rules in the US for electronic volumes to really pick up.

But although brokers are hopeful that the final shape of regulations in the US and Europe will mandate a strictly defined shift towards e-trading for rates, they aren’t waiting with bated breath for a sudden surge in liquidity.

One broker working for one of the big three European brokers said: “The trouble is, more than two years after Dodd-Frank was passed, we still don’t know quite when rules are going to arrive or quite what they’ll look like.”

Some dealers think there is a more prosaic answer as to why electronic liquidity started to pick in September after a prolonged malaise.

As the graph below from Icap shows, there is a near-perfect inverse correlation between volatility in the 10-year euro rates market and the percentage of the group’s trades that are conducted electronically via iSwap.

Since European Central Bank president Mario Draghi’s pledge in late July to do “whatever it takes” to save the euro, there has been a marked improvement in market sentiment, say brokers.

Don McClumpha, chief executive of iSwap, said the improvement has translated into a big increase in electronic trading volumes: “In a market which favours efficient flows and fast matching, electronic trading of swaps comes into its own.”

The broker is already seeing a concentration of electronic liquidity into standardised two, five and 10-year tenors, he added.

Other dealers argue there may yet be enough flow to go around among the platforms. One global head of rates e-commerce said: “We act as a guaranteed liquidity-provider on one platform, but we’re very active on all others.